Question

Subject 3: Exchange Rates and International Finance (30%) The sales manager of a US company trades iPhones in three different markets, Europe (Eurozone), UK and the USA, has just received a total amount of $1million from the selling of 1,000 iPhones (each iPhone costs $1,000). He has a week available until the payment of firm's suppliers and employees' salaries. The current exchange rates between the currencies of the three markets (USD $, euro € and GBP £), are: Eėjs = 0.9110, EējE = 1.1712 and E}/= 1.2910 a) If no transaction costs exist, could the manager take advantage of an arbitrage opportunity? Explain. [Mark 1.5] b) When will there not be any room for profits? That is, there is no arbitrage opportunity. [Mark 0.5] c) Suppose now that there is a cost each time currency is being traded, i.e., either bought or sold. Moreover, this transaction cost is equal to 1% of the value of currency that is traded. What will the manager's decision be in this case? [Mark 1.0] Note: Round your answers to the third decimal point.

Answer 1

Amouer Amount Recieved ER (4X) - 0.9110 $1 million ER ()-1.1912 ERC Let comeent 1 $millim to Euros Er(e) = 0.9110 - 1 million & (x) 0.9110 a 0.9110 million Eura. I Now convert o.9210 million Eures to pound (£ It- 1.8712 € 1t= 1 € 1.1712 09 110 € = (90.91 € 1 11792 » 0.7278 million pound Haw Connent 0-7778 millim pound to dollar, again 16. = 1.2910 # 0.7770 mill f= - 1.2920 $0 0.7778 (1.004 millin A la 1 million dollar converted to 1.004 milion & hence the Scope of Arbitrage is therein canned with amScanner

classmate Date - Ресе eb There will be no room for propo. When 1 million USA gets convert to 1 milion us dollar wing ( Exchang raty.. 6 Transaction cost = 11 of value of currency.) Convert 1 millim US$1 to Euros - 1 million US$1 (89 0.9110 (1 - 1%) 0.9 0189 Euns - transachen und transachen wat Convert 0.90189 million Emo, to pound o 90 189 0 (1-2% - 1 1.1712 0.76235 million poung. Convert 0.76235 million pounds to USA - 8-7623500 1.2910 15 (1-12) 20-92435 millon dallan. hence 1 millim $ converted to 0.97435 millon dallos usy. Exchange make hence (arbitrage not possible) scanned with CamScanner